New Zealand economy headed for disaster

You probably won't see this in the feel-good reporting of the mainstream NZ media.

I have omitted links - these are in the original article.

12 Reasons Why New Zealand's Economic Bubble Will End In Disaster

Forbes,

17 April, 2014

New Zealand’s economy has been hailed as one of world’s top safe-haven economies in recent years after it emerged from Global Financial Crisis relatively unscathed. Unfortunately, my research has found that many of today’s so-called safe-havens (such as Singapore) are experiencing economic bubbles that are strikingly similar to those that led to the financial crisis in the first place.

Though I will be writing a lengthy report about New Zealand’s economic bubble in the near future, I wanted to use this column to outline key points that are helpful for those who are looking for a concise explanation of this bubble.

Here are the reasons why I believe that New Zealand’s economy is heading for a crisis:

1) Interest rates have been at all-time lows for almost a half-decade

Ultra-low interest rate environments are notorious for fueling credit and housing bubbles, which is how the U.S. housing and credit bubble inflated last decade. New Zealand’s interest rates have been at record lows for nearly five years, which is more than enough time for economic bubbles and related imbalances to form.

Here is the chart of New Zealand’s benchmark interest rate:

new-zealand-interest-rate

Source: TradingEconomics.com

New Zealand’s three-month interbank rate, base lending rate, and 10 year government bond yield are also at or near all-time lows. Like many countries that are experiencing bubbles in recent years, New Zealand’s low interest rates are a byproduct of global “hot money” flows from the United States and Japan, which have both had zero interest rates and quantitative easing programs to boost their economies after the Global Financial Crisis.

Low interest rates in the U.S. and Japan encouraged capital to flow into higher yielding investments in countries such as New Zealand, which led to reduced bond yields and an 85 increase in the value of the New Zealand dollar against the U.S. dollar since 2009. To combat the export-harming currency appreciation and bolster the economy during the financial crisis, New Zealand’s central bank reduced its short-term interest rates to all-time lows.

2) Property prices have doubled since 2004

Following the pattern of many nations outside of the hard-hit U.S., peripheral Europe, and Japan, New Zealand’s housing prices have doubled in the past decade, forming a property bubble:

HousingPrices

Source: Global Property Guide

3) New Zealand has the world’s third most overvalued property market

The doubling of New Zealand’s housing prices in the past decade far surpassed household income and rent growth, making the country’s property market the third most overvalued in the world. New Zealand’s home price-to-rent ratio is 77 percent above its historic average and its home price-to-income ratio is 26 percent above its historic average.

4) New Zealand’s mortgage bubble grew by 165% since 2002

New Zealand’s housing bubble is driven by a mortgage bubble that grew from approximately NZD $70 billion in 2002 to NZD $186 billion in 2013 – a 165 percent increase in a little over a decade. New Zealand’s mortgage debt bubble grew at a faster rate than its economy during this time, causing the country’s total outstanding mortgage debt-to-GDP ratio to rise from approximately 57 percent to 85 percent.

5) Nearly half of mortgages have floating interest rates

New Zealand’s ultra-low interest rate environment has encouraged the country’s home buyers to make many of the same mistakes that the American home buyers did during last decade’s bubble. One of the gravest of these mistakes is using adjustable or floating rate mortgages, which will reset at higher interest rates when the low interest rate environment ultimately ends.

Almost half of New Zealand’s outstanding mortgages currently have floating interest rates, which is up significantly in the past decade:

Variable Mortgage Rates

Chart source: MacroBusiness

6) Mortgages account for 60% of banks’ loan portfolios

As if the fact that almost half of New Zealand’s mortgages have floating rates isn’t scary enough, mortgages now account for 60 percent of the country’s banks’ loan portfolios, which means that the financial sector is heavily exposed to the eventual popping of the housing bubble.

7) Finance, not agriculture, is New Zealand’s largest industry

Though New Zealand is commonly thought to be an agriculture-based economy, this couldn’t be further from the truth. Agriculture accounts for only 5.1 percent of New Zealand’s GDP, while the finance, insurance and business services sector is the country’s largest sector, contributing 28.8 percent to the GDP. Furthermore, banks account for 80 percent of the total assets of New Zealand’s financial system. Not only is New Zealand’s banking system dangerously exposed to the country’s property and credit bubble, but so is the entire economy.

8) New Zealand’s banks are exposed to Australia’s bubble

New Zealand’s banking system is dominated by four banks that are Australian-owned subsidiaries, which means that New Zealand’s banking system is exposed to the inevitable popping of Australia’s credit and property bubble. Australia’s household debt-to-income ratio recently rose to 177 percent from approximately 110 percent in the year 2000, while housing prices increased 150 percent in nominal terms and 85 percent in real terms. Australia’s housing market is now the world’s fifth most overvalued housing market.

9) Australian and Chinese buyers are inflating the property bubble

An influx of foreign home buyers in recent years has contributed to the inflation of New Zealand’s housing bubble. Australians and Chinese – who both hail from countries that are experiencing bubbles – account for 42 percent of these foreign buyers, which means that the false prosperity booms in Australia and China are spilling over into New Zealand’s housing market.

Here are a few statistics about China economic bubble:

• China’s total domestic credit more than doubled to $23 trillion from $9 trillion in 2008, which is equivalent to adding the entire U.S. commercial banking sector.

• Borrowing has risen as a share of China’s national income to more than 200 percent, from 135 percent in 2008.

• China’s credit growth rate is now faster than Japan’s before its 1990 bust and America’s before 2008, with half of that growth in the shadow-banking sector.

(Note: Both New Zealand and Australia are also exposed to the coming popping of China’s economic bubble because their economies rely heavily on exports to China.)

10) New Zealand has a household debt problem

New Zealand has the fourth worst household debt-to-GDP ratio among advanced economies, surpassing even the United States:

Household Debt

Source: Reserve Bank of New Zealand

New Zealand’s household debt-to-disposable income ratio soared from 100 percent in the early-2000s to just under 150 percent in recent years thanks in large part to the country’s mortgage bubble. New Zealand’s ultra-low interest rates have prevented its large household debt from becoming an even greater problem, but this situation can change dramatically when interest rates eventually rise again.

11) Government overseas debt has nearly tripled since 2008

New Zealand’s government took advantage of the plunging yields on its bonds (which is courtesy of the global QE and ZIRP-driven bond bubble) after the Global Financial Crisis to nearly triple its overseas borrowing:

Overseas Debt

Source: Wikipedia; RBNZ

The global bond bubble has provided New Zealand’s government with a low-cost borrowing opportunity that is unlikely to be replicated anytime soon, especially now that the U.S. Federal Reserve is slated to completely taper or end its QE3 bond buying program this year.

12) The New Zealand dollar is overvalued

Hot money inflows (a byproduct of QE and zero interest rate policies) into New Zealand after the financial crisis helped the New Zealand dollar to strengthen by 85 percent against the U.S. dollar:

NZD/USD

Source: XE.com

After its strong appreciation against both the U.S. and Australian dollars over the past decade, the New Zealand dollar is now overvalued by as much as 20 percent according to some estimates. New Zealand’s Finance Minister Bill English stated in February that the overvalued dollar is “a concern” because it risks harming the country’s exporters. If the New Zealand dollar’s overvaluation was to abruptly correct and even overshoot to the downside (a possible result of the Fed’s taper), New Zealand’s central bank may be forced to hike its key interest rate to prevent further declines.

How New Zealand’s Economic Bubble Will Pop

New Zealand’s economic bubble will likely pop as a result of rising interest rates across the yield curve, which would put pressure on the country’s property and credit bubbles. New Zealand’s key interest rate is expected to continue rising after its March hike due to rising domestic inflationary pressures, while longer-term bond yields are likely to rise as a side-effect of the Fed’s taper and eventual Fed Funds rate increase. The popping of Australia and China’s bubbles are two other external factors that have a high probability of contributing to the popping of New Zealand’s bubble.

Here is what to expect when New Zealand’s economic bubble truly pops:

Here is what to expect when New Zealand’s economic bubble truly pops:

• The property bubble will pop
• Banks will experience losses on their mortgage portfolios
• The country’s credit boom will turn into a bust
• Over-leveraged consumers will default on their debts
• Stock and bond prices will fall; the New Zealand dollar may weaken
• Economic growth will go into reverse
• Unemployment will rise

I will be publishing a full comprehensive report about New Zealand’s economic bubble in the near future, so please follow the directions below to receive my updates.

Please follow me on Twitter, Google+ and Facebook to stay informed about the most important bubble news and my related commentary.

The Australian economy continues to deteriorate

Top end caught flat-footed as property slump worsens

Melbourne's rich and famous are facing losses of up to 25 per cent in the luxury apartment market as the top-end property slump worsens

the Australian,

6 May, 2012

Prestige areas, including Toorak, Brighton, East Melbourne, Southbank and St Kilda Road, where hundreds of $1 million-plus apartments have been for sale, have been hit hardest over the past year, according to research by Australian Property Monitors.

Owners of some of the most expensive penthouses and flats in the city are having to slash their asking prices by millions in some cases to close deals. Others have had to sell for well below what they paid, even after years in the exclusive buildings.

Industry sources say Lleyton Hewitt is one to feel the pinch, cutting the asking price for his St Kilda Road penthouse from $15 million to $10 million. The tennis champ bought the 19th-floor of the Yve development for $8.32 million in 2004, and spent nearly four years fitting it out.

The tough conditions, blamed on a glut of luxury apartments and jitters about the economy, are set to get worse as more than 13,000 new inner-city apartments hit the market.

Andrew Wilson, senior economist at the Fairfax-owned analysts APM, said the top-end apartment market was facing a ''convergence of negative factors''.

''The popularity of penthouse, inner-city living has certainly dropped off sharply since the heady days of the boom before the global financial crisis,'' he said.

''Subdued performance for the sharemarket, the slowdown in the wider property market and signals that Victoria has one of the worst performing economies on the mainland - it's all happening at once.''

Jean-Pierre Heurteau paid about $3.23 million in 2006 for an off-the-plan, two-bedroom apartment in the Lucient building on St Kilda Road.

The interior decorator hoped to get at least $2.9 million for the 14th-floor flat when it was listed last year, but had to settle for $2.81 million.

''It's the times,'' he said. ''I don't think it was because the apartment was wrong or bad, the apartment was fabulous. It's just the way it is.''

Valuer John Sommers, of McRae Property, said many owners were learning the hard way that off-the-plan apartments are often sold at prices that had little to do with their actual value, and could take years to show any meaningful capital growth.

''The price that's paid is a reflection of what the developer needs to make out of the project to make it all stack up,'' he said.

''It's not just at the top end, it's apartments in those locations in modern buildings.''

In one example, a four-bedroom apartment in Docklands was bought for $3.5 million in 2004 and sold late last year for the same price. Melbourne's median unit price rose 44 per cent over the same period.

Buyer's advocate Mal James said a big issue for the $1 million-plus apartment market was that buildings were always facing competition from the ''next best thing''.

''The demand is there initially because they are new and exciting, but in two or three years yours isn't new and exciting, then demand is lower,'' Mr James said. ''I also don't think it means the market is falling apart because someone tried and failed to get some big number.''

Agents argue that statistics purporting to measure the prestige property market are ''alarmist'' and ''misleading'' because they are based on few sales.

Icon Property's Robert Mitchelson said that while there was no doubt the market was ''tough'', deals were still being done and some buyers were now wanting to get back into the market because of the recent price falls.

Analysts Charter Keck Cramer estimate that 49 new buildings with about 13,100 apartments are under construction or being marketed for sale in the CBD, Southbank, St Kilda Road and Docklands.

It is Budget Day in Australia today.

This article points out how bad things have got.

Few measures for business to cheer in a tougher trading environment

AUSTRALIAN businesses endured a much tougher trading environment last month, and economists doubt today's budget will contain much to reverse the trend.

The Australian,

7 May, 2012

Reported profitability, export volumes and trading conditions slumped last month, according to a National Australia Bank monthly business survey. Conditions deteriorated across all industries, especially for transport and utilities firms.

Based on a survey of 400 firms, use of available production capacity fell to 79.4 per cent, the lowest level since the middle of 2009.

"Mining continued to outperform all other industries, while manufacturing conditions remained worryingly low," the survey's authors said.

Peter Anderson, head of the Australian Chamber of Commerce and Industry, told The Australian businesses needed to be realistic about what to expect from the budget given the government's desire to forecast a surplus.

HSBC's chief economist Paul Bloxham agreed, saying there would be little to cheer about.

"There's likely to be no room for treats or extra spending for businesses," he said. "Nevertheless, the government's reported decision to boost payments to families in lieu of the education tax refund might lead to a bit more consumption spending, which might help.

"Not going ahead with the carbon tax would be the single best thing the government could announce," Mr Anderson said, adding it was unlikely, "but we are looking forward to confirmation of the one percentage point cut in company tax."

The company tax rate is expected to fall to 29 per cent on July 1, but the measure is not legislated. The opposition opposes the cut because it is linked to revenue from the minerals resource rent tax, which it also opposes.

Mr Anderson said he worried the government might pay for the cut by reducing R&D incentives.

"Apart from measures already announced, such as a $5000 deduction for new car purchases and the likely introduction of 'loss-carry backs', businesses should not be expecting too much this budget," said Brian Redican, an economist at Macquarie Bank.

James McIntyre, an economist at Commonwealth Bank, said small businesses in particular would welcome new loss provisions, which are expected to allow firms to offset losses and prior tax paid up to a nominal cap.

"But big businesses will be worried about how the measure is going to be paid for," he said. The Business Working Group, which recommended "loss carry-backs", also suggested scrapping mining firms' ability to deduct prospecting and exploration costs immediately, which could save up to $1.2 billion across four years.

Mr Redican said that rumoured public-sector cuts of up to 30 per cent in some federal departments could spell trouble for businesses in the ACT. "Big public-sector job cuts would hit local cafes and restaurants, even stationery suppliers to government departments," he said.

The Business Council of Australia has argued for a cap on government taxes at 23.7 per cent of GDP, as lower taxes tend to foster quicker economic growth, which is good for business. The government expects tax receipts to be 22.6 per cent this financial year, but projects they will rise to 24 per cent in 2014.

"Maintaining an explicit cap for the level of taxation as a share of GDP as a discipline to the size of government is an essential element of keeping Australia competitive," the BCA said in its pre-budget submission.

Europe... The United States... China... Looks like everything’s coming down together - a slow(ish) train wreck.

China Property Dip Sparks Bank Fears

CNBC,

Published: Monday, 21 Nov 2011 | 7:16 PM ET

Originally published in the Financial Times

The number of property transactions in China’s largest cities has fallen to dangerously low levels, according to regulatory documents obtained by the Financial Times.

According to the documents, the China Banking Regulatory Commission earlier this year ordered domestic banks to weigh the impact of a 30 per cent decline in housing transactions in “stress tests” aimed at determining the health of the Chinese financial system.

While the government has been trying to rein in sky-high property prices, a Chinese real estate slump would have a significant ripple effect on the global economy. Property construction accounted for more than 13 per cent of China’s economy last year.

In April the CBRC told banks to test their loan books against a 50 percent fall in prices, and also a 30 per cent fall in transaction volumes.

In October, however, property transactions fell 39 percent year-on-year in China’s 15 biggest cities , according to government data. Nationwide, transactions dropped 11.6 percent, accelerating from a 7 percent fall in September.

The fall-off in transactions has affected developers’ cash flows and, in some cases, their ability to repay bank loans. Rising defaults after a lending surge in 2009 and 2010, much of which ended up in the property sector, were cited by the International Monetary Fund this month as one of the Chinese financial sector’s biggest risks.

The CBRC has not released the results and declined to comment. But one analyst who reviewed the stress-test documents said they did not take into account the impact that fewer transactions and lower property prices would have on bank collateral.

“If developers can’t sell property and local governments can’t sell land, it’s hard to see why banks would be any better at either task under such conditions,” the analyst said.

Chinese regulatory officials admit privately that the tests need to be improved. One senior official said banks were often unaware that loans to big state-owned enterprises had been funnelled to real estate subsidiaries, and acknowledged that the impact on collateral had not been fully taken into account.

The weaknesses in the Chinese scenarios echo earlier problems with stress testing in the European Union, where regulators underestimated the potential impact of a sovereign debt crisis.

The fear is that the impact of a bursting of the Chinese property bubble could yield a crisis just as dramatic as the one now unfolding in Europe. Rising defaults after a lending surge in 2009 and 2010, much of which ended up in the property sector, were flagged by the International Monetary Fund this month as one of the major risks hanging over the Chinese financial sector.

While Beijing’s campaign to cool the property market has had its intended effect, some analysts worry that the government has underestimated the impact its measures are having.

The measures, including higher downpayments and restrictions on home purchases, have taken nearly two years to gain traction.

But the concern is that the government will have trouble shifting gears quickly to respond if necessary. The fall in the number of in buyers is also beginning to weigh on construction, which could deal a blow to the wider economy.

Those knock-on effects were barely tested in the stress analysis. Banks were told to catalogue a series of property-related loans: to developers, for mortgages and to upstream industries like cement and downstream industries like furnishings. But the methodology imagines that while house prices drop, overall economic growth remains more or less unimpaired.

“Before property prices drop 30 percent, one needs to think how much sales are down and, more importantly, how much construction is down. Not only will that impact on steel and cement, but it also would mean a drop in industrial production, investment and jobs,” one analyst told the FT.

Another analyst said the stress tests did not do a good job of grappling with the way a property slump would ripple through the banking system by resulting in falling land sales and prices on the value of bank collateral. Yet the vast majority of collateral in the Chinese banking system is land or property, so a slump could force writedowns across the board.

“This is the key correlation risk. If developers can’t sell property and local governments can’t sell land, it’s hard to see why banks would be any better at either task under such conditions,” the analyst said.

China property market dip may have global impact

Times of India,

13 November, 2011

China's property market, a mainstay of the world's second-largest economy, has started to suffer a downturn that could have a knock-on effect on global trade in commodities, analysts warn. 

Housebuying demand has fallen across China after authorities, fearing a property bubble, banned second home purchases in places including Beijing, increased minimum down payments and trialled property taxes in some cities. 

At the same time, property developers have been hit by a lack of funds after the government hiked interest rates and restricted bank lending to rein in surging inflation and bring real estate prices into line. 

Last week, Premier Wen Jiabao dashed hopes that measures to control the property market would be relaxed, saying these would not change and adding housing prices should now return to "reasonable levels". 

"On the global economy, the biggest impact would be on the commodity sector," said Yao Wei, a China economist at Societe Generale based in Hong Kong. 

"If China's property sector goes through a downturn, the demand for things like cement, steel, concrete, aluminum will all be affected." 

Last month, 177 property agencies shut down in Beijing alone after sales nose-dived, according to a report published this week by Home Link China -- one of the country's biggest estate agencies. 

There are now more than 120,000 unsold properties on the market in the capital, the highest number in 29 months, the state-run Beijing News daily said, citing official figures released Friday. 

And in Shanghai, hundreds of angry home buyers have launched a series of protests since October after developers slashed prices for some new projects, causing an outcry among those who had just bought at higher levels. 

Potential buyers are now holding off as they wait for the prices to fall further, making it hard for estate agents and developers to get apartments off the market. 

In the eastern city of Yueqing, one property firm even offered a brand new BMW car to the first 150 buyers of flats in a new residential complex. 

Priced at around 300,000 yuan ($47,000), the BMW makes up roughly 13 percent of the price of an apartment in the compound. Other developers are also offering incentives such as free garages or air conditioning. 

"I do expect a negative impact for several months, if not quarters," Zhang Zhiwei, an analyst from Nomura Securities in Hong Kong, told AFP. 

"Prices are just starting to fall and sales data in October looked pretty bad." 

Ratings agency Standard & Poor's said last month it expected China's property prices to fall by 10 percent nationwide over the next year. 

Yao goes even further, saying prices could drop as much as 15 percent and the downturn may last longer than one that happened in late 2008-early 2009 -- "because this time we will not have a four-trillion-yuan stimulus". 

Beijing's stimulus package -- equivalent to $635 billion -- to respond to the global financial crisis was accompanied by an opening of credit valves, contributing to the hike in real estate prices in 2009 and 2010. 

China was eventually forced to restrict lending after the policy drove up inflation. 

Zhang, like Yao, said that if the downturn was confirmed over the next few months, it would have an impact on the global economy as China's vast construction sector would be hit, with repercussions abroad in turn. 

And because real estate has links with many other industries, sectors such as consumer goods, decoration and electronics could also be affected, Yao warned. "When people buy property, they will definitely buy something new." 

Still, analysts say that strong domestic demand in China -- with its rapid urbanisation and modernisation -- is expected to ease the blow. 

"Most investors are not heavily leveraged, because they pay a big downpayment for property," Ren Xianfang from IHS Global Insight in Beijing said. 

But she still warned that "real estate has been a cash cow for a lot of companies" and that many would suffer from a downturn as a result.

China: Nearly 1,000 Real Estate Outlets Close in Beijing

VOA

13 November, 2011

China says nearly 1,000 real estate outlets in the nation’s capital have been forced to close this year, as a slew of new government restrictions on property sales continue to cool Beijing’s once red-hot property market.

The official Xinhua news agency reported the slowdown Tuesday, citing a survey by the real estate firm Home Link China.

The survey said Beijing has seen more than 100 real estate storefronts close in each of several consecutive months. It said more than 70 percent of the shuttered stores were owned by small and medium-sized agencies.

Xinhua links the closures to government moves earlier this year restricting residents in 43 major cities from buying second and third homes.

Land and Resources Minister Xu Shaoshi said then that increased demand for property, largely from investors, had driven real estate prices beyond the reach of many Chinese. He said the price increase had led to what he called the “uneven allocation of benefits and social conflicts.”

China last year began tightening limits on mortgage lending to discourage investment buying. Beijing also introduced trial property taxes in some cities.

Property values in China

Why pose the question?

Property Prices Collapse in China. Is This a Crash?

Forbes,

6 November, 2011

Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market.  The country’s largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing.  In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project.  “The price war has begun,” said Alan Chiang Sheung-lai of property consultant DTZ to the South China Morning Post.

What started slowly in September turned into a rout by the middle of last month—normally a good period for sales—when Shanghai developers started to slash asking prices.  Analysts then expected falling property values to move Premier Wen Jiabao to relax tightening measures, such as increases in mortgage rates and prohibitions on second-home purchases, intended to cool the market.

They were wrong.  After a State Council meeting on October 29, Mr. Wen affirmed his policy, stating that local authorities should continue to “strictly implement the central government’s real estate policies in the coming months to let citizens see the results of the curbs.”  Then, the selling began in earnest as “desperate” developers competed among themselves to unload inventory.  One builder—Excellence Group—even said it would sell flats in Huizhou at its development cost.

Citi’s Oscar Choi believes prices will decline another 10% next year, but that’s a conservative estimate.  Even state-funded experts are more pessimistic.  For example, Cao Jianhai of the prestigious Chinese Academy of Social Sciences sees price cuts of 50% on homes if the government continues its cooling measures.

When Beijing’s pet analysts are saying prices could halve in a few months, we can be sure they are thinking the eventual sell-off will be worse.  In any event, the markets are bracing for trouble.  Investors are dumping both the bonds and the shares of Chinese developers, and legendary bear Jim Chanos, citing the property market, late last month said he is still not covering his short positions on China.

One does not have to agree that China will be “Dubai times 1,000—or worse”—Chanos’s memorable phrase—to understand that the unwinding of “the biggest housing bubble ever created” will be especially painful.  Analysts have great confidence in Beijing’s technocrats because they managed to continue to manufacture growth through the global downturn, but most of us seem to forget that the Chinese, through massive stimulus, created even bigger challenges for themselves.  At the moment, Beijing has yet to resolve two intractable problems: persistent inflation and artificially high property prices.

The dominant narrative at the moment is that China’s economic managers will skillfully deflate the property bubble and land the economy softly.  As Time observes, “Many observers say a sharp economic decline won’t be permitted to happen before the change of leadership in 2012.”

Won’t be permitted?  It is true that Beijing’s technocrats have had the advantage of working in a semi-closed system that has allowed them to use the considerable resources of the state to achieve outcomes not possible in freer economies.  Nonetheless, they can continue to do so—in other words, defy economic principles—only as long as market participants—in this case builders, local officials, and homeowners—cooperate.

The last four weeks, however, must have been a sobering period for Premier Wen, and not only because developers began to lose their nerve.  For one thing, recent purchasers have taken to the streets because they had suffered losses even before taking possession of their homes.  A crowd of about 300 people in Shanghai smashed windows at the sales office of Longfor Properties on October 22, two days after the builder had ended a sales promotion on a project.  The protestors had bought properties in earlier phases of the same project at prices as much as 30% higher than the discounted ones.

And then, on the 23rd, a smaller crowd—on the same street—demonstrated against another developer, Greenland Group.  Protesters were injured in Shanghai at another demonstration, this time against a unit of China Overseas Holdings.  There were also protests against builders in Beijing and in other cities, Hangzhou and Nanjing.

The cities of Hangzhou and Hefei have reportedly told developers to limit discounts to 20% to avoid unrest, but the attempt to establish fiat prices will not work for long because many builders face insolvency.

Moreover, Premier Wen has to be concerned that sometimes he cannot control his own cities, which have flouted his decrees by removing curbs on property ownership.  Nanjing defied Beijing and relaxed mortgage rules, as did Anhui province.  At least in Foshan, a city in Guangdong, central authorities apparently convinced local leaders to rescind their earlier decision to scrap centrally mandated curbs.

The overriding reality is that, because of Beijing’s stimulus spending, there are too many properties and not enough buyers at this time.  The market will have to arrive at equilibrium at some point, but what is surprising is the rapidity at which this is now happening.  In common parlance, it’s called a crash.